Water: Options for a thirsty world

Despite knowing they face climate change, many people remain unprepared to cut yearly air-mileages, car trips or the number of energy-inefficient gadgets they possess. Even fewer of us would reduce the amount of time spent under the shower.

Water scarcity has been on scientists’ minds and humanitarian organisations’ agendas for some time, but it seems that despite some daunting figures, the alarm bells are just not loud enough.

According to data collected by Citigroup, precipitation patterns are changing locations and are becoming heavier, briefer and less frequent. Australia’s rainfall trend is switching from west to east. Drought is increasing as precipitation over land has marginally decreased while evaporation has increased. Pollution is rising. Water in most of China’s five major rivers is unsafe for direct human contact and nearly two thirds of China’s large cities are facing serious wastewater pollution. Snow cover is decreasing and from the South American Andes to the Asian Indus River basin, the area covered by glaciers is shrinking.

“The picture is quite scary. There are regions like the Mediterranean and northern Africa where all the expectations, from both a climate-change point of view and an economic and sociological point of view, head towards the same direction, which is water stress, not within the next 100 years but within the next 15 years,” says Professor Pavel Kabat, head of earth systems sciences and climate studies at The Netherlands’ Wageningen University.

Slow progress

He points out how three years after the first discussions at the 2003 World Water Forum in Kyoto, he attended the 2006 meeting in Mexico ready to examine what had been achieved. To his surprise, not much had been done. “We had to start all over again,” he says. “Water is a long-term issue and [should not be left] in the hands of politicians that only look at the next election. The water issue will have a big enough economic and financial impact in then next years [but] the cost hasn’t spiralled enough in the minds of policy-makers. Water issues should be taken out of the erratic character of the political life.”

Even gloomier a picture is that of a water war ­scenario. Almost half the world’s population lives in 263 international river basins. The Danube, Rhine, Congo, Nile, Niger and Zambezi rivers all pass through nine or more nations. But most of these basins have no treaties to share the water. The two largest of these mega-aquifers are both under threat from over-exploitation and could become the subject of disputes.

Although not necessarily believing that the world will go to war for water, some think that we might witness the phenomenon of water refugees as soon as in the next 15 years, due to droughts and glacier retreats. According to the United Nations, about 50% of the world population will live in water-stressed conditions in the next 15 years.

Furthermore, the very nature of water makes finding a solution harder. Water is not fungible – unlike oil or other natural resources: it is not easily or economically transportable – it costs more to transport water than oil, the latter being heavier than the former; freshwater availability has been altered by climate change; and, finally, water is essential not only to human life, but also to pretty much all human activity, including agriculture and industry.

“You can’t pipe water across Australia, water is heavy and relatively low cost, so transportation costs are too expensive,” says Edward Kerschner, chief investment strategist at Citi Global Wealth Management, “while you pipe oil across Alaska.”

Investment openings

While these predictions may have failed to scare politicians into serious action, the corporate and financial worlds are taking note. Water-related problems are close enough to hit agriculture and industry and to offer new investment opportunities to the ones that come up with solutions.

The worldwide consumption of water per year, including agriculture, industrial and household consumption, is 5500 cubic kilometres. Agriculture accounts for 70% of this, followed by industry. In particular, Asia’s economic growth is adding further stress to water resources. The region is the world’s biggest consumer and its wealthier middle classes’ demand for agricultural produce and meat products keeps on growing. Compared with a vegetarian diet, a diet containing 20% meat doubles water consumption.

As an example: a single orange needs 53 litres of water to grow; 200 litres are required to make 1 kilogrammes of steel; 1500 litres to produce a kilogram of grain and 16,000 litres for every kilogram of beef. And yet water footprint is not a priority for policy-makers nor is it being widely discussed.

Furthermore, water is essential for energy production. A nuclear plant needs 3700 litres of water per megawatt hour (MWh). Coal and gas are not far behind, with 3400 litres per MWh and 2700 litres per MWh, respectively. On the ‘green’ side, photovoltaic and wind energy require little or no water, while US corn ethanol production requires some 18 litres of water for every 4.5 litres of product – between three and four times more water than conventional crude refining.

To make matters worse, the percentage of water lost through pipe networks or simple inefficiency is even more distressing. In a city such as London, where the water pipeline network dates back to the 19th century, almost 50% of water is lost in leaks before it reaches consumers. Furthermore, only 5% of supplied water is actually used – whether for household or industrial consumption - while the remaining 95% is literally poured down the drain and not necessarily reclaimed.

Non-governmental organisations’ pressure on companies such as Coca-Cola, Nestlé and Danone has helped spurring corporates into action (see Remedies for wasteful water management). In developed countries, there has been a movement to discourage consumers from drinking bottled water, which has a high carbon foot print. Former London mayor Ken Livingstone launched a ‘London on Tap’ blitz earlier this year, urging consumers not to be embarrassed about asking for tap water in restaurants, as some imported brands travel from as far as New Zealand. In June, the New York City Council announced that, like other government agencies, it will stop buying bottled water for its offices.

The business of water

In response to such headline-grabbing announcements, Nestlé Waters, a unit of Nestlé that sells brands Perrier, Poland Spring and other spring waters, has communicated to the public a reduction in its package weight and instituted energy efficiencies and land conservation projects. Coca-Cola, which makes Dasani purified water, has increased recycling and water efficiency, reduced the weight of plastic bottles and is working with the World Wildlife Fund on projects to conserve seven freshwater river basins.

In good corporate fashion, others are transforming the water scarcity threat into an opportunity. Many of the major utilities in Europe and the US are sharpening both their water-related technologies and their management strategies. Good examples are Suez and Veolia in France, Danaher in the US, SABESP in Brazil and Severn Trent in the UK. Interestingly, a small UK water company, Folkestone and Dover Water, has taken a very progressive approach to water scarcity. Its main strategy is to manage customer demand downwards. They hope to reduce demand by more than 10% by 2020/2030, to 100 litres per person per day.

“This is the amount the UK government advocated in its recent water strategy,” says Trevor Bishop, head of water resource policy at the UK Environmental Agency. The company plans to achieve this by charging cheap tariffs for an initial volume of water usage and raising the price afterwards. They will also engage in educational activities and support the use of efficient taps and slow-flow shower designs. “Other companies [however] believe that they can’t reduce consumption and that it will continue to rise,” says Mr Bishop.

Companies that make pipes and pumps are also set to attract investors’ attention, as are desalination technology developers and water efficiency companies – Switzerland’s Geberit and the US’s Maytag are thriving due to their simple idea of double-flow flushing toilets.

Always eager to find new investment opportunities for their clients, banks have not waited long before creating a water segment in their research recommendations. Products such as water-related stock indices are now structured and sold by most big banks.

Water scarcity has also prompted lenders’ involvement in infrastructure and water management projects around the world.

In Europe, Spain has suffered its worst drought in decades. The World Metereological Organisation noted that between October 2004 and June 2005, rainfall was less than half the normal in areas of Spain. After heavy rainfalls in 2007, Spanish reservoir levels have resumed their downturn trend. Luis Miguel Palancar, responsible for environmental project finance at BBVA, says that the growth of water-related projects in the country is accompanied by an increasing involvement of private financing, rather than public funding.

“The biggest spenders in water infrastructure at the moment are Europe, America and Asia,” says Michael O’Sullivan, head of UK Research and global asset allocation at Credit Suisse. “The areas we expect to see more growth in water expenditure are emerging markets: Russia and China don’t really have proper water infrastructure yet.”

Desalination expansion

Desalination projects are also growing in popularity. The desalination process takes salty water from the sea and through different techniques (from the more traditional condensation technology to the more advanced reverse osmosis) transforms it into fresh water. With 97% of the world’s water captured in seas, and the reduction of freshwater sources, desalination has become an economically viable solution in many locations of the world and currently more than 200 such plants are in planning or up for consideration. In California alone, 18 plants are being discussed.

“We see the geographic spread of these projects out of the traditional areas such as the Middle East,” says Jacques Labre, director of institutional relations at Suez Environment, a world leader in water projects and technology. “You can see that today the Mediterranean area and Mexico – and the UK and the US in the near future – are becoming new expansion areas for desalination. The reason is that the purpose of those plants is not only to provide basic [water supplies] in dry countries but also to drought-proof the conventional supply in coastal cities. Also, energy required by desalination plants is decreasing and this is one of the reasons why desalination is booming.”

Waste avoidance

Mary Kelly, a vice-president at the Environmental Defence Fund, who specialises in rivers and deltas, says: “We have our hands full with water challenges, but the good news is that there is enough water to go around in many places, if we allocate it properly and don’t waste it.” But this is easier said than done, adds Ms Kelly.

Based in the US, the Environmental Defence Fund fosters the role of the free market in the search for a climate change solution. Given the unique nature of water, it is fundamental that governments put in place clear and workable frameworks before market mechanisms can serve a useful function. The free market has been called into action in other climate change-related spheres, such as energy and carbon dioxide emissions, without necessarily delivering the desired results. With water, rather than calling for deregulation, observers say a harmonised, clear, transparent and flexible framework is needed.

The US has various layers of laws governing water. The case of the Colorado River basin is indicative. The river flows through seven states and Mexico. Within the states, water rights are allocated by the state government, but there also is an agreement between those seven states, a federal law – since the federal government has built two reservoirs on the river – and a treaty between the US and Mexico allocating water rights between the two countries. Some say that the system is not flexible enough to accommodate states’ changing needs.

In Europe the situation is no simpler. Despite numerous EU water directives driving up standards, including the EU Water Framework Directive, water issues are very often managed at a city level across Europe. Harmonisation would help reduce costs and efficiently address the many water challenges. “You don’t want to see 300 municipalities in Europe or the US each trying to figure out how to run the water system,” says Mr Kerschner. “There is no efficiency there. So you’ll find that this will gradually be outsourced to the major water companies.”

Since the first privatisation in 1853, when Napoleon III of France founded the Compagnie Générale des Eaux by imperial decree, water has also been a private sector matter. Since the first contracts to supply water to the city of Lyon and a few years later to Paris, the involvement of the private sector and the markets have developed. Beside privatisation, there are other crucial roles that the private sector can play.

The most evident is the continuous engagement with governments for the transfer of effective management techniques and water-related technologies. Operators and financiers involved in government partnerships are also very much needed, as are clear regulatory frameworks.

“One of the challenges is to get the right procurement in place to allow the private sector to enter the market,” says Ger Bergkamp, director-general of the World Water Council, the organisation that co-ordinates the World Water Forum. “Without a good framework and legal certainties there is no chance that any private sector company would enter a contract. In that, the water sector is no different from any other sector.” But there is something else that businesses can do.

Texan billionaire T Boone Pickens is very much aware of this. The 80-year old investor made his fortune in the oil market and has invested $58m of his own money in a portfolio of alternative energy solutions, including what is set to be the world’s largest wind farm. He has also started acquiring ground water rights. When a business tycoon acquires something, it is only natural for the rest of the world to assume that that something will go up in price and that there will be buyers willing to purchase it.

In some measure, water rights are currently being traded between municipalities. Such a system seems to work better in regional areas, where local resistance is minimal and populations do not feel that water has been taken from their reservoirs by outsiders. Furthermore, there is the physical impediment to the transport of water.

Observers believe that Mr Pickens will end up selling his water rights to nearby cities in Texas, perhaps not at such a high price as he anticipated, but should a trading market develop, it is also foreseeable that there will be space in the future for some specialised brokers. Also, the dry-year option leases – which gives the buyer the right to buy water from the seller – is currently being arranged between local authorities and agricultural users in states such as California, but might well grow into a well defined structured finance product.

“All this will potentially lead to a cap-and-trade system,” says Ms Kelly. “It’s going to be very different from a carbon dioxide cap-and-trade system because it will fluctuate according to whether it’s a wet year or a dry year and trading will be a bit different.” A cap-and-trade water system could allocate water rights to higher value users, such as agriculture and industry – provided basic human rights needs are met first.

Ecosystem management

At the basis of such a system there needs to be a clear definition of how much to leave in the ecosystem to guarantee its reliability, which would secure water supply. Such a concept is called environmental flow.

A pilot scheme that has put a cap on how much water to take from the ecosystem has been developed around the Murray-Darling Basin in Australia. Currently, there is also a 4% cap on water that can be traded out of the basin and a proposal to lift it to 6% by 2010. The basin serves an area that covers one seventh of the country, supports 3 million Australians and produces $9bn worth of rural exports. Last year, however, the water flowing into the basin from the Murray and Darling rivers was the lowest since records began in 1892.

Having been involved in many water-related projects, Emmanuelle Rogy, head of project finance at BNP Paribas, recognises the utility of such a reallocation scheme, at least in farming, suggesting that it should not be the water but its value-added users who have to move. “It’s not very efficient to have expensive farming in Spain that uses desalinated water while you can farm in a different place close to fresh water resources. There are benefits in trading water allocation but it would be difficult to move farmers that have lived in a certain area for many generations.”

Looking at the uninspiring results of the carbon dioxide cap-and-trade scheme, it is at least hoped that some lessons will be learned before embarking on a water-rights trading system. On the other hand, should there be a need to move away from such market-based initiatives, the alternative to contain water consumption would be taxation. But, as Ms Kelly says: “If you think there is a resistance to an energy tax, wait until we start talking about a water tax!”

WHAT CAN BE DONE?

Solutions

• Incentives to reduce water consumption: cheaper first litres and much more expensive prices for further consumption.

• Water efficiency: industrial, agricultural, municipal and household solutions to reduce waste and increase water reclaim.

• Investment in technology: desalination and other water and waste water treatments are increasingly important.

• Market harmonisation: economies of scale and clear, transparent and flexible regulation are essential.

• Free market solutions: cap-and-trade system and water rights schemes might help.

• Political support and accountability: put your money where your mouth is.

AVERAGE USE OF WATER BY POWER TYPE:

_{Data provided by Environmental Defence Fund}